T.C. Memo. 2001-125
UNITED STATES TAX COURT
DORIS NEILL MOZLEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4865-00. Filed May 30, 2001.
Doris Neill Mozley, pro se.
Timothy B. Heavner, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS, Judge: Respondent determined deficiencies in
petitioner’s Federal income taxes of $964 for 1995 and $3,442 for
1996.
The issue for decision is whether petitioner’s receipt of a
portion of military retirement pay to which petitioner’s former
husband otherwise was entitled constitutes receipt of taxable: (1)
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Alimony pursuant to sections 61(a)(8) and 71; or, in the
alternative, (2) pension income pursuant to section 61(a)(11).
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the years in issue.
FINDINGS OF FACT
Some of the facts have been stipulated and are found
accordingly. The stipulation of facts and the attached exhibits
are incorporated herein by this reference.
Background
Petitioner resided in Richmond, Virginia, at the time she
filed her petition. She timely filed Federal income tax returns
for 1995 and 1996.
On June 15, 1952, petitioner married Paul David Mozley. Mr.
Mozley served in the U.S. Navy Medical Corps for 20 years and
retired in 1975. Upon his retirement, Mr. Mozley began receiving
military retirement payments.
The Agreement
In April 1983, petitioner and Mr. Mozley divorced. They
reached an agreement (the agreement) concerning the division of
their property as well as the amount of alimony petitioner was to
receive. Pursuant to the agreement, petitioner was to receive one-
half of Mr. Mozley’s disposable military retirement pay until her
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death, regardless of her marital status. Both petitioner and Mr.
Mozley were represented by counsel during the course of their
divorce proceedings.
The District Court of Pitt County, North Carolina (the
district court), adopted the agreement as part of its April 19,
1983, Judgment and Order (the April 1983 Judgment). The portions
of the April 1983 Judgment, as relevant to the issue before us,
provide as follows:
8. In full and final settlement of all claims
existing between the parties, and in particular, in full
and final settlement of any claims that the plaintiff
[petitioner] may have against the defendant [Mr. Mozley]
for alimony pendente lite, alimony, and attorney’s fees,
and as a full and final property and marital settlement
resolving all issues between the parties including
equitable distribution of marital property, the parties
do hereby stipulate, agree, contract, and pray that the
court order and enter as its mandate, the following:
* * * * * * *
(i) The defendant shall pay to the plaintiff as
alimony a sum equal to 22 percent of his salary that he
actually receives other than the retired/retainer pay
that he receives by virtue of his retirement from the
United States Navy. * * *
* * * * * * *
(l) * * * As additional alimony, the plaintiff
shall receive a portion of the defendant’s
retired/retainer pay that he receives by virtue of his
previous military service. * * * The remaining pay * *
* shall be divided equally between the parties. The
portion of this pay allotted to the plaintiff * * * shall
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be considered as alimony by the plaintiff and included by
her in her taxable income. * * * [These payments] shall
continue on the 10th day of each month thereafter until
the death of the plaintiff regardless of her marital
status * * *
* * * * * * *
(n) All payments required to be made by the
defendant to the plaintiff are intended to be payments of
alimony and said payments of alimony shall be deductible
by the defendant and taxable to the plaintiff on their
federal and state income tax returns. The plaintiff
shall declare said payments received as alimony and
income to her on her tax returns.
(o) This agreement has been negotiated and executed
on the assumption that the payments made by the defendant
to the plaintiff or made on his behalf will be deductible
by the defendant and taxable to the plaintiff. If, as a
result of a final and binding judicial determination, or
because of the subsequent change in the governing law or
its authorizative [sic] interpretation, it is established
that any or all of said payments will no longer be
taxable to the plaintiff or deductible to the defendant,
the provisions regarding alimony shall be subject to
renegotiation. If the defendant and the plaintiff are
unable to arrive at a mutually satisfactory readjustment
of these provisions to take account of the changed tax
impact, then the matter shall be submitted to a court for
final and binding determination. Such renegotiatibility
[sic] shall in no event effect [sic] the validity of the
remaining provisions of this consent order and property
settlement.
In August 1996, petitioner and Mr. Mozley amended the
agreement (the amended agreement), and the district court entered
a Memorandum of Order, incorporating the amended agreement. In
relevant part, this order stated:
10.(b) [The payment to petitioner of half of
her former spouse’s military retirement pay should
continue as agreed] except that the plaintiff shall
receive the payment directly from the Navy in the
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manner presently being paid by the Navy and the
parties agree that this arrangement shall continue
without protest by the parties regarding the method
used by the Navy to compute the amount paid to the
plaintiff, subject to the 15% limitation for
disability portion of the Navy retirement.
From August 1983 through the date of trial (January 8, 2001),
petitioner received a portion of Mr. Mozley’s military retirement
pay from the Navy Finance Center in Cleveland, Ohio.
During the years in issue, petitioner received a total of
$14,588 for 1995 and $13,880 for 1996, as her share of Mr. Mozley’s
military retirement pay.
Petitioner’s Returns
Petitioner reported her share of Mr. Mozley’s military
retirement pay as income on her Federal income tax returns for 1983
through 1990; she did not do so for 1991 through 1999.
Notice of Deficiency
In the notice of deficiency, respondent determined that the
military retirement payments petitioner received in 1995 and 1996
constituted taxable alimony to her.
OPINION
We first decide whether the military retirement payments
petitioner received during the years in issue constituted taxable
alimony, as respondent contends, or a nontaxable division of
property, as petitioner maintains.
Gross income includes amounts received as alimony or separate
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maintenance payments. See secs. 61(a)(8), 71(a). At the time of
petitioner’s divorce in 1983, section 71 provided:
If a wife is divorced or legally separated from her
husband under a decree of divorce * * *, the wife’s
gross income includes periodic payments * * *
received after such decree in discharge of * * * a
legal obligation which, because of the marital or
family relationship, is imposed on or incurred by
the husband under the decree or under a written
instrument incident to such divorce or separation.
Section 71 was amended by the Deficit Reduction Act of 1984
(DEFRA 1984), Pub. L. 98-369, sec. 422(a), 98 Stat. 494, 795.
However, DEFRA 1984 is applicable only to divorce instruments
executed after December 31, 1984, or modified after December 31,
1984, where the modified instrument states that the amended version
of section 71 will apply. See DEFRA 1984, supra at 798. Here, the
agreement was entered in April 1983 and the modified agreement was
entered in August 1996. The amended agreement neither modified the
description or terms (i.e., the amount and frequency) of the alimony
payments nor expressly provided that amended section 71 was
applicable. Thus, we apply former section 71 to determine whether
the military retirement payments petitioner received constitute
alimony.
Pursuant to former section 71, only payments in the nature of
maintenance or support (as opposed to a transfer of property between
spouses) are treated as alimony for Federal income tax purposes.
See, e.g., Hoover v. Commissioner, 102 F.3d 842, 844-845 (6th Cir.
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1996), affg. T.C. Memo. 1995-183. In determining whether payments
constitute alimony or a division of property, we are not bound by
the labels assigned to the payments by the parties in their
agreement. See Hesse v. Commissioner, 60 T.C. 685, 691 (1973),
affd. without published opinion 511 F.2d 1393 (3d Cir. 1975). On
the other hand, in deciding the character of an award in a divorce
or separation decree, we give great weight to the language and
structure of the decree. See, e.g., Griffith v. Commissioner, 749
F.2d 11, 13 (6th Cir. 1984), affg. T.C. Memo. 1983-278. Whether
payments represent support or a property settlement is a question
of the parties’ intent. See Hoover v. Commissioner, supra at 845.
We ascertain this intent not only from the underlying agreement but
from the particular facts and circumstances involved. See, e.g.,
Boucher v. Commissioner, 710 F.2d 507, 509 (9th Cir. 1983), affg.
T.C. Memo. 1981-258.
This Court has frequently looked to State law in considering
whether payments between spouses constitute alimony or a property
settlement. See Yoakum v. Commissioner, 82 T.C. 128, 140 (1984).
Here, the applicable State law is that of North Carolina, and we
therefore look to the law of that State. Under North Carolina law
(as existing at the time of petitioner’s divorce), military
retirement pay was the separate property of the spouse who had
served in the military (here, Mr. Mozley) and was not subject to
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division or distribution by a court.1 See N.C. Gen. Stat. secs. 50-
20(b)(2), 50-20(a) (1981). Thus, as applicable to the instant
situation, even though the district court lacked authority to order
a division of Mr. Mozley’s military retirement pay, Mr. Mozley had
the ability to divide his retirement payments with petitioner; and
in fact, he agreed to do so pursuant to paragraph 8(l) of the
agreement.
On the basis of the clear and unambiguous language of the
agreement and amended agreement, we conclude that the payments to
petitioner should be characterized as alimony. We reach this
conclusion based on the following. First, the agreement
characterizes the payments in question as “alimony” and contains
other provisions that specifically relate to the division of the
parties’ property.2 Second, the agreement specifically provides
that the payments in question are “intended to be payments of
alimony”. Third, the agreement specifically states that the
1
After the entry of petitioner’s divorce, North Carolina
amended its law, effective Aug. 1, 1983, to treat military
retirement pension as marital property, thus subjecting military
retirement to a Court’s equitable distribution authority. See
N.C. Gen. Stat. sec. 50-20 (1999); Morris v. Morris, 339 S.E.2d
424 (N.C. Ct. App. 1986).
2
We are mindful that par. 8(l), which refers to the
payment of one-half of Mr. Mozley’s military retirement payments
as “additional alimony” to petitioner, closely followed par.
8(i), which discusses “alimony”. Reading these paragraphs in
tandem supports our conclusion that the payments at issue
constitute alimony.
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payments are to be taxable to petitioner and deductible by Mr.
Mozley. Fourth, the agreement states that if the intended tax
consequences of the payments (i.e., taxable to petitioner;
deductible by Mr. Mozley) were judicially altered, the amount to be
paid to petitioner would become subject to renegotiation.
The language of the agreement is unambiguous; it contains
express direction that the military retirement payments petitioner
is to receive constitute alimony. These payments were (1) periodic;
(2) received after a decree in discharge of a legal obligation; and
(3) because of the marital or family relationship, imposed on or
incurred by the husband under the decree or under a written
instrument incident to such divorce or separation. See Brodersen
v. Commissioner, 57 T.C. 412, 415-416 (1971).
Both petitioner and Mr. Mozley were represented by counsel.
There is nothing in the record to indicate that the agreement was
negotiated other than at arm’s length. We therefore assume that the
parties considered their respective tax obligations.
To conclude, considering all of the facts and circumstances
herein, we hold that the military retirement payments petitioner
received during the years in issue were in the nature of alimony and
thus constitute taxable income to her.
In light of this holding, we need not address the issue of
whether the retirement payments constitute pension income.
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We have considered all arguments raised by petitioner and find
them to be without merit. Moreover, we have reviewed all cases
cited by petitioner and find them either distinguishable or in
accord with the conclusion reached herein.
To reflect the foregoing,
Decision will be entered
for respondent.